Emirates reports a USD600 million 1HFY2014 profit but sees a 'challenging' environment

Analysis

Emirates chairman and CEO Sheikh Ahmed bin Saeed Al Maktoum has described the global business environment as “challenging”, as the Emirates Group reported a profit of AED2.2 billion (USD600 million) for the six months to 30-Sep-2013. The profit result was up only 4% on the same period in 2012, while group revenue rose 13%. The Emirates Group described the result as a “robust performance” and a reflection of its “steady focus on its long-term vision and business growth”.

Sheikh Ahmed struck an unusually cautious tone for Emirates, despite returning a profit most airlines would only dream of. While Group revenue rose to AED42.3 billion (USD11.5 billion), the carrier’s mainline Emirates passenger airline business saw its bottom line results improved only 2%, to a net profit position of AED1.7 billion (USD475 million). The results show “steady demand for our products and services” according to Sheik Ahmed, and capacity and route growth “continue to match and meet passenger demand”.

Fuel prices and the economic environment hurt Emirates just like everyone else

In its results announcement, the carrier noted the “fundamental challenges of high fuel prices, a still-recovering global economy, and a strong performance of the US dollar (the Emirati Dirham is linked to the dollar) against other major currencies” has an impact on revenues.

But Emirates has a powerful weapon, aside even from its unique network pull: its overall product is allowing it to drive higher yields, as the carrier’s accessibility grows. Emirates’ airline revenue, including other operating income, was AED39.8 billion (USD10.8 billion), up 12% year-on-year, reflecting “passenger demand and strong yield”. The chairman noted that high airline fuel prices, accounting for 39% of its expenditures, and the unfavourable currency exchange environment “continue to eat into our profits”. Despite this, the carrier remains one of the fastest growing and most profitable major international airlines.

Emirates handled 21.5 million passengers in the half-year period, an increase of 15% year-on-year, while adding 10 new widebody aircraft – six A380s, three 777s and one 777 freighter – to its fleet, as well as new destinations - Haneda, Stockholm, Clark, Conakry, and Sialkot, described as “key cities and regional airports currently underserved by non-stop international services”. In these words are encapsulated a remarkable network expansion strategy which enables the airline to put three times daily widebodies (an A380 and two 777-300ERs) into a regional centre like Manchester in the UK – and fill them.

Capacity as measured in Available Seat Kilometres (ASKs), grew by 16.9%, whilst passenger traffic, as measured in Revenue Passenger Kilometres (RPKs), was up 16.1%. Passenger load factor was described as “steady” at 79.2%, down slightly by 0.5 percentage points on last year.

Cargo growth swims against the tide of weakness experienced by others

The carrier also increased cargo volume by 5.2% year-on-year, a self-described “remarkable growth and performance” against the declining global cargo trend. The latest IATA traffic figures show that globally freight demand measured in Freight Tonne Kilometres (FTKs) has risen just 0.7% for the year to the end of Aug-2013.

(Yet IATA’s traffic analysis also shows that Middle East FTKs have risen by 12.7% for the same period. So, while Emirates may be well ahead of the global freight trend, it is apparently lagging the regional one.)

Fuel accounted for 39% of costs

The carrier’s operating costs were not disclosed, but the chairman noted that high fuel prices accounted for 39% of the carrier’s expenditures, while the unfavourable currency exchange environment “continue to eat into our profits”.

Despite this, the carrier and the group “remain steadfast in our vision to be the airline of choice for international air services, and we will invest in our people and our infrastructure, and work closely with our partners to bring this to fruition,” said Sheikh Ahmed.

Cash position takes a hit as Emirates pays for new aircraft – with new orders expected next week

The Emirates Group’s cash position declined considerably in the six month period, falling to AED18.2 billion (USD 4.9 billion) on 30-Sep-2013, compared to AED27.0 billion (USD7.3 billion) as of 31-Mar-2013. During the period, Emirates had the following major cash outlays:

AED7 billion (USD1.9 billion) injection back into the business to fund new aircraft, engines, spares and other projects across the group.

In a recent interview with Bloomberg,Emirates senior VP for corporate treasury Brian Jeffery said the carrier needs funding of USD5.5 billion this financial year to cover 25 aircraft, and will require an average of USD5.34 billion of financing p/a to cover the 119 aircraft deliveries it has scheduled over the next five years.

The airline is considering multiple financing options, including further Islamic financing facilities, bond market issues, commercial debt, operating leases and export credits and enhanced equipment trust certificates. According to Mr Jeffery, the Dubai government has no plans for an IPO for the airline - to the best of his knowledge.

To support the growth and its long-term expansion, Emirates Group (Emirates and dnata) increased its employee headcount by 11.7%, to over 75,800 compared with 31-Mar-2013.

dnata is the junior partner of the Emirates Group, contributing less than 10% of group revenue, but its results provided a major bottom line contribution over the first six months of the year. dnata’s revenues rose 18% to AED3.7 billion (US1 billion). The air travel services provider’s profits were AED458 million (USD125 million), an increase of 13% and slightly better than 20% of overall Emirates Group profits.

One of the keys to the growth at dnata was the company’s in-flight catering operation, which acquired Italy’s Servair in Jun-2013. The expansion of its catering operations saw in-flight catering revenue up 39%, with meal uplift increasing 81%. Growth at dnata’s airport operations and Travel Services operation was more normal, both increasing 16%. Cargo handling division revenue rose only 4%, reflecting the generally lacklustre state of global air cargo.

Unlike Emirates Airline, which sticks to a platform based on organic growth, dnata uses acquisitions to fuel its growth. In addition to the Servair purchase, dnata acquired Broadlex Air Services on 16-Apr-2013. This is on top of other acquisitions in the previous year, including En Route International Ltd and Travel Republic.

Emirates plans to continue its organic expansion, even in the face of high costs, poor travel demand and lacklustre profits. Despite the obstacles and cyclical nature of the business, the airline has added seven new routes in the past year, while concentrating on thickening operations on established routes.

Sheik Ahmed has emphasised that the group’s ability to stay agile in the changing conditions, allows it to “adapt and act quickly”, but the airline remains a growth focused operation. Even with the long term goals, Emirates has kept a “close watch managing our immediate business targets” says Sheik Ahmed. The carrier noted that its new destinations added since the start of the financial year – Tokyo Haneda, Stockholm, Clark, Conakry and Sialkot – include key cities and regional airports currently underserved by non-stop international services.

The carrier is due to take delivery of 25 aircraft over this financial year, and has 21 new aircraft scheduled to be delivered in the next 12 months, comprising 10 A380s, nine Boeing 777-300ER and two 777Fs. Additional new routes to be added in the remaining part of the fiscal year include Kabul, Kiev, Taipei and Boston. Markets such as India, the US and Africa remain ripe for expansion, and the airline will continue to add aircraft and destinations and add millions of new passengers.

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